White House Nixes Hedge Funds’ Proposal For Fannie Mae, Freddie Mac

The White House ignored the proposal of a group of hedge funds to take over the primary operations of the government-sponsored enterprises (GSEs), Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and that is to guarantee mortgage-backed securities.

The Financial Times indicated in its report that the Obama Administration is against the plan because of the risk of creating two new “too big to fail” institutions. According to Gene Sperling, the national economic council director said the government is committed in preventing the resumption of the duopoly that existed prior to the financial crisis.

US government rescued Fannie Mae and Freddie Mac from bankruptcy

The United States government rescued Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) from bankruptcy by providing billions of dollars of taxpayer money to continue its operations. Since then, the mortgage giants were placed under the conservatorship of the federal government.

The hedge funds acquired a segment amount of common and preferred shares of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) as they believed that the stock price of both companies will improve by implementing reforms. However, the hedge funds may not be able to achieve their hopes because of the intervention of the White House.

“All of us should fear that we could re-create a duopoly that the market would perceive as too-big-to-fail market entities with an implicit government guarantee, the core of the failed business model we are trying to replace,” said Sperling.

Berkowitz sent his proposal to the Treasury Department

Last week, Bruce Berkowitz of Fairholme Funds sent his proposal to the Treasury Department to acquire the insurance business of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and indicated his plan to provide $52 billion recapitalization to the GSEs. Paulson & Co. and The Blackstone Group L.P. (NYSE:BX) supported Berkowitz’s proposal

However, Sperling said the proposed new companies would have the advantage to topple new entrants in the mortgage sector. He said, “I want to make clear, the Obama administration believes the risks are too great that this model would recreate the problems of the past.”